The Intangible Value

Wednesday, October 24, 2007

Earlier this week, Cisco acquired Navini Networks for $330 Million. Navini is a WiMAX base station maker and an early pioneer of Beam Forming Antenna Technology. It is primarily a hardware company which sells its gear to Operators. The value of the company is tied to its assets, customers and its Intellectual Property. It was pretty much an open secret and I had blogged about it before here.

Today, Microsoft invested $240 Million in Facebook for a 1.6 % stake of the company. That gives Facebook a valuation of $15 Billion. Facebook is a social network. Its value is intangible. It derives its value from the personal networks between friends. It has no IP of its own and its assets are negligible. Last year Yahoo was willing to buy Facebook for $1 Billion. Today its fifteen times that value.

The contrast between these two deals cannot be more striking. A $15 billion valuation for a social networking company sounds nonsensical to us in this part of the world. We place much more value in real world relations than the virtual ones. But for those who do give value to the virtual communities, this deal would make a lot more sense. In those economies, the value proposition has moved away from manufacturing and IP to virtual goods.

This is the emergence of Facebook as the Google killer. Google has been steamrolling all competition in recent days and its good to see someone standing up to it. Maybe this also means the gradual transformation of Microsoft into a Internet Services company. Maybe Mark Zuckerburg is the next Bill Gates.

As for Google, they will have to compete with Facebook on their own turf. There have been news of Google opening up the API of Orkut. Orkut is a big ticket in Brazil and India. It still has to play catch up.

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Comments:

Interesting you use the word 'intangible'. The word 'asset' in a corporate context means anything that results in probable future earnings. And these have traditionally been looked at as property, equipment, real estate, cash, etc -- i.e., tangible assets.

But the 'intangibles' section in the balance sheets for internet companies makes up a huge percentage of total assets. Case in point: Google itself -- Google's brand equity now gives it a significant advantage which results in direct financial gain...and this equity is essentially an intangible.

The only problem: quantifying this intangible is an exercise in imprecise subjectivity at best. There is NO way that Facebook's valuation is $15 B. No way in hell.

Then again, MS's acquisition did not follow a strictly financial directive; this is a strategic play. Its going to be fascinating...

Nice Article Rajiv. The facebook evaluation is very high mainly because of the TIME that it is operating where web 2.0 is the buzzword at this moment. Compared to any product companies, the internet companies tend to get high value in the short term especially for early movers. But in the long term the product companies having a solid product base tend to have more sustainability.